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Manchester City are facing a cut in their Champions League squad size and a heavy fine for breaching UEFA's Financial Fair Play regulations.

As revealed by The London Telegraph, the investigatory chamber of the European game's Club Financial Control Body has decided that City's unprecedented £1 billion ($1.8 billion) spending spree under the ownership of Sheikh Mansour did not comply with FFP rules.

The Telegraph learnt that City have been offered a punishment which includes a combination of financial and sporting sanctions - if they agree not to fight their guilty verdict. The latter penalty would leave the club unable to register a full 25-man squad for the Champions League next season, potentially denying them use of millions of pounds worth of their own talent and hurting their ability to recruit players this summer.

Strife: Manchester City must make a decision over the settlement offer in the next two days. Photo: Reuters

City were given until Thursday night to agree what is known as a "settlement" offer with the CFCB, a sanction which is open to negotiation but only to moderate effect. Were they to fail to reach a consensus or refuse to accept their guilt, their case would transfer to the CFCB's adjudicatory chamber, which would assess afresh whether they breached FFP and, if so, what punishment to impose.

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City and UEFA declined to comment last night on precise details of any settlement offer or whether one had already been agreed but European football's governing body has previously made it clear that fighting on would put a club at risk of a more severe penalty, including expulsion from the Champions League.

Even if City agree to settle their case, FFP rules allow Premier League rivals such as Arsenal and Everton to challenge any sanction they deem too lenient. The latter clubs could argue City's breach materially affected their chances of finishing third or fourth in the table, and thus hindered their European qualification hopes.

Mock-up: A fan holds a Manchester City 'banknote'.

Having posted losses of £149 million ($270.5 million) over that period, the activities of City's Abu Dhabi-based owners were always going to be heavily scrutinised under regulations that permitted clubs to lose £37.2 million ($67.5 million) after certain exceptions were discounted. It is City's attempts to balance their books which were most closely examined, particularly their 10-year, £350 million ($635 million) sponsorship deal with Etihad, the official airline of Abu Dhabi.

FFP rules prohibit transactions with companies which have ties to a club or their owners being used in this way unless they can be shown to represent fair market value. Designed to prevent wealthy owners artificially inflating the value of such deals, their validity is judged on three criteria.

If it is shown to be a related-party transaction, UEFA's auditors calculate how much equivalent media exposure would have cost through the company advertising in other ways, how the tie-up compares with those struck by similar clubs, and what independent marketing experts think of the agreement.

Paris St-Germain are the other big name to have been found guilty of breaching FFP by the CFCB's investigatory chamber and they were also made a settlement offer including financial and sporting sanctions.

PSG had previously argued that their €200 million-a-year ($298 million) commercial arrangement with the Qatar Tourism Authority is above board but it emerged last month that Uefa had serious doubts over its validity and the French champions' attitude to scrutiny of it.

The CFCB investigatory chamber will meet Thursday, and possibly Friday, to approve settlement offers agreed with the less than 20 clubs found to have breached FFP regulations and refer any outstanding cases to the adjudicatory chamber.

Settlement offers will not be rubber-stamped by the head of the investigatory chamber, the former Belgian Prime Minister Jean-Luc Dehaene, until next week.